PropertyCentral Weekly 3

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PropertyCentral.sg Weekly Issue #1

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ContentsPage 2 - Property Market Correction - What FactorsShould Investors Look Out For?

Page 8 - Resale Property Transactions(8th August to 17th August)

Page 12 - Weekly Top 3 Deals



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Property Market Correction - What Factors Should Investors Look Out For?Written by: Mr Getty Goh, Director ofAscendant Assets


My company, Ascendant Assets PteLtd, frequently hold talks and seminarsthat teach aspiring property investorshow to understand the Singaporeproperty market as well as to look forvalue-for-money deals.

In those talks, one common questionthat is posed to me is what investorsshould look out for to tell if the marketis starting to weaken. To answer thatquestion, my research team did ananalysis sometime back to compare

the correlation between the mediancondominium and apartment pricesand the following factors:

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1. Foreign Direct Investment (FDI).

2. Number of foreigners in Singapore.

3. Number of Singapore residents.

4. Number of marriages in Singapore.

5. 3-Months SIBOR (Singapore InterbankOffer Rate).

This post would only be elaborating on 3 ofthe 5 factors mentioned.

Correlation is broadly defined as astatistical measure of how two factorsbehave in relation to each other and itranges from +1 to -1. A perfect positivecorrelation (correlation co-efficient of +1)implies that as one factor (i.e. FDI)moves either up or down, the otherfactor (i.e. private property prices) will

follow in the same direction. If thecorrelation coefficient is 0, the movementof the factors are said to have nocorre lat ion and movements arecompletely random with respect to eachother. Statistically, factors that have acorrelation index of more than 0.5 can be

deemed to be highly correlated.

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The effects of foreign investments

FDI in Singapore measures the amount ofinvestment by foreign investors in their Singaporeaffiliated companies where they own at least 10per cent of paid up capital. It is important tonote that FDI does not represent the amount ofmoney that goes into the real estate market.However, an increase in FDI could lead tocomplementary business and real estate

activities that in turn would have an impact onthe real estate market (i.e. the opening of a localoffice that could lead to an increase in thenumber of foreigner staffs who need to rent).Nonetheless, in the absence of other morerelevant data, FDI is mainly used as a proxy togive us an idea of the amount of foreigninvestments that is coming into Singapore over

the years.

Figure 1 shows how the FDI as well as medianproperty prices changed from 1999 to 2008. Bycomparing FDI against median $psf forapartments and condominiums, we found thatthe correlation coefficient was 0.87 and 0.91respectively.

Figure 1: Correlation between FDI and

median $psf for apartments/condominiums from 1999 to 2008

Source: Department of Statistics, URA andAscendant Assets Pte Ltd

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The effects of domestic demand

To analyse the impact of domestic demand onthe private residential market, the number ofmarriages was used as a proxy for this analysis.Based on convention, most Singaporeans wouldstart looking for properties when they settledown and get married.

Even if many do not buy a private property astheir first home, the impact of domestic demandcould spill over to the private residential market ifthey were to buy a flat from the resale market,and the owner, who sold his flat to the newlymarried couple, in turn upgrades and buys aprivate property.

If this happens often enough, we should be able

to see some trends between the number of newmarriages and private property prices.

However, from Figure 2, we can see that there ishardly any discernible trend.

Figure 2: Number of marriages and median

$psf of apartments/ condominiums from1990 to 2009


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Not surprisingly, the correlation between thenumber of marriages and median $psf for

apartments and condominiums is 0.07 and 0.36respectively.

What about interest rates?

Many people believe that low interest rates arethe cause of the current high demand forproperties. If that relationship were true, we

would expect high inverse correlation (ofbetween -0.5 and -1).

An inverse correlation occurs because propertyprices should drop as interest rates goes up;conversely property prices should increase asinterest rates drop.

However from Figure 3, we can see that there

does not appear to be a discernible trend. Inaddition, the correlation between the 3-monthSIBOR and median $psf for apartments andcondominium is just -0.35 and -0.31.

Figure 3: 3-month SIBOR (%) and median

$psf of apartments/ condominiums from1988 to 2009


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From this, we can tell that there is a weak

correlation and infer that interest rates (thatfluctuate within an acceptable range) wouldunlikely be a showstopper for someonewho is thinking of buying a property.

If you think about your own property buyingexperience, how much significance do you

place on interest rates such that it affectsyour buying decision? As long as interestrates do not go excessively high, I wouldreckon that things such as affordability andlocation would probably matter more.

Rounding it up

To conclude, what would I look at to tell if aproperty market correction is coming? One ofthe key things I would look at is foreign directinvestment, while I would probably not focustoo much on things like number of marriagesand SIBOR rates.

In other words, the mass exodus of foreigninvestment and/or foreign interest would likelybring about a drop in property prices. Ofcourse, there are many other factors thatshould be considered and what I have coveredis just the tip of the iceberg. Unfortunately, anin-depth discussion is beyond the scope of thisblog.

Nonetheless, I hope that through this article,you will realize that there is a lot more to theproperty market than what you might think.

And hopefully this will kick start your journey inproperty investing.

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Page

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Property Transactions for the 8th August - 17th August


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This data only covers non-landed residential resale property transactions with caveatslodged with the Singapore Land Authority. Caveats are usually lodged at least 2-3 weeksafter a purchaser signs an OTP, thus the delayed nature of the data.


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Weekly Top 3 Deals

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